“After years of underweight we are rebuilding our positions in China, including the finance sector,” Boscher told FSA.
“We are reasonably constructive on China, considering that the political risks and economic risks are under control, driving us to maintain a reasonable exposure, although we are still putting aside low quality banks”.
Recently, Deutsche AM, Fidelity and Matthews Asia also expressed positive sentiment on China.
Boscher said a major game changer was when China’s Producer Price Index (PPI) turned positive late last year. It has since increased by 7.8% in February 2017 from a year earlier, the fastest pace since 2008.
Investors would like to see China spark global inflation. If Chinese exporters have higher supply chain costs, it may result in negotiations with importers for higher asking prices. Whether the PPI will remain positive is a matter of debate, however.
“As the PPI in China leans back into positive territory, it can put an end to this deflationary trend in Europe and the rest of the world,” Boscher said. He added that China has had an appropriately modest hike in interest rates, which signals a move away from the deflationary threat.
“Typically in China we have the tendency of being too cautious, especially with banks, which have a level of transparency that is below the bar. That contributed in the past to create a situation of underperformance.”
India underweight
Elsewhere in emerging markets, Malaysian equities have become attractive. Boscher cited the country’s fiscal discipline and clear economic improvement which is stronger than in other emerging markets markets thanks to higher oil prices and commodities prices.
“We are revising upward our expectations about Malaysia. In relative terms, when we look at Malaysia we find some attractive valuations and dividend yield.”
However, the firm’s India overweight has been reduced for several reasons. Inflation remains at 4% and may increase, while investment is likely to stay weak given the overhang of stressed loans in the banking sector and stretched balance sheets for big corporates, Boscher said.
Valuations of India equities have already priced in some structural improvements, and the fiscal deficit (around -3% in 2016) is likely to improve only gradually, if at all, he added.
Investment process
Boscher said the emerging markets team has 29 people globally “creating an emerging equity network”. Their approach is benchmark-agnostic.
Each investment team focuses on a specific country but they have a common approach to identifying stock opportunities through a bottom-up analysis. Criteria include earnings trends, sustainability of growth and competition, profitability, return on deployed capital and risks, such as corporate governance, competitive threats, debt management and shareholding structure.
Once individual stocks are chosen, the manager analyses the price daily and decides whether to send a sell signal if the target is reached. Selling usually triggers the need to identify a new investment case.
“Sometimes we sell too early”, he acknowledged, especially when it comes to China, after years of underweighting China stocks.
“In the emerging markets, on the one hand, we pick countries, and [then] we pick stocks. [However] in the developed world, the story is mainly, though not exclusively, about picking stocks.”
Although the firm may use artificial intelligence software to pick stocks in developed markets, it does not use it in emerging markets. “Data [in emerging markets] is not always reliable and it is necessary, more than anywhere else, to meet with corporate management,” he explained.
